Last Chance for the 115th: Unshackle Middle-Class Investors and Entrepreneurs

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This June here at OpenMarket we’ll be looking at what the 115th Congress, which began January 3, 2017 and runs through January 3, 2019, has accomplished so far and what might still be achieved for limited government and free markets before it’s over. Read more about the Competitive Enterprise Institute’s recommendations for legislative reform here.

Congress and President Trump recently gave Main Street banks and credit unions some much-need but still modest relief from the mountains of red tape stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act. Yet, as I have pointed out, some of the most onerous and nonsensical provisions were left untouched.

Also inexplicably, the Senate bill left out access-to-capital measures that passed by wide bipartisan margins—even unanimously in one case—in the U.S. House of Representatives. While small and midsize banks and credit unions got needed relief, middle-class investors and entrepreneurs also need Congress to cut the red tape strangling their ability to achieve the American Dream.

As House Financial Services Committee Chairman Jeb Hensarling recently stated in a committee markup, “Clearly our local community banks or credit unions can provide consumers with a checking account, car loan, or home mortgage; but more often than not, it is our capital markets that finance their careers, their salaries, and their retirement plans.” One could add that vibrant capital markets enable startup entrepreneurs to build businesses and middle-class investors to grow wealthy with them.

The good news is that there is still time for the Senate to finish the job. Here is a list of House measures the Senate should definitely pass, as well as bipartisan Senate measures that would be a first step to lifting regulatory barriers so that capital markets work for everyone. These are bills to build on the success of the Jumpstart Our Business Startup (JOBS) Act, a bipartisan deregulatory investment law signed by President Obama. Here is a list of three bills the Senate should definitely pass.

H.R. 1585, the Fair Investment Opportunities for Professional Experts Act, sponsored by Rep. David Schweikert (R-AZ), would allow non-wealthy Americans who have proven their investing competence, such as licensed brokers and investment advisers, to participate in private offerings free of most of the red tape from Sarbanes-Oxley, Dodd-Frank, and other securities laws. Under Regulation D, which the Securities and Exchange Commission promulgated in 1982, these “accredited investors” have been strictly defined as those who have at least $1 million in assets other than their principal residence, or who have made $200,000 per year for three of the last five years.

Now, if this bill is enacted into law, some non-wealthy investors could join the “accredited” club for the first time. The bill passed the U.S. House of Representatives unanimously through a “voice vote” that no House member objected to on Nov 1, 2017. Yet for some reason it's languishing in the U.S. Senate.

H.R. 1645, the Fostering Innovation Act, sponsored by Rep. Kyrsten Sinema (D-AZ), extends the JOBS Act exemption from some of the most onerous mandates of Dodd-Frank and Sarbanes-Oxley from five years to ten years for small companies going public. In the previous Congress, this bill also passed the House by voice vote but stalled in the Senate. This year, it was combined with other bills when it passed the House, so fewer Democrats supported it. But the JOBS Act extension itself still should garner wide bipartisan support. It is strongly supported by the Biotechnology Industry Organization (BIO), which represents pioneering biotech food and drug firms. BIO said in a news release, “The additional five years of cost-savings would allow growing companies to focus their capital on groundbreaking R&D rather than one-size-fits-all regulatory burdens.”

Then there is H.R. 6021/ S. 3004 the Small Business Audit Correction Act, which provides much-needed regulatory relief for small investment broker/dealers by exempting them from stringent audit requirements of the Public Company Accounting Oversight Board, the quasigovernment accounting regulator created by Sarbanes-Oxley that was given additional powers over small brokers by Dodd-Frank (see my CEI report that outlines PCAOB’s overreach). Both the House and Senate versions of this bill were introduced by bipartisan cosponsors: Sens. Tom Cotton (R-AR) and Doug Jones (D-AL) and Reps. Vicente Gonzalez (D-TX) and French Hill (R-AR) in the House. Utah-based PSP Consulting, which advises many small broker-dealers throughout the country, states: “The PCAOB audit requirement does not make sense and is the wrong fit for privately-held, non-custodial, small Broker/Dealers. Our companies are not publicly traded companies and therefore do not have any public shareholders and we do not hold or carry customer funds or securities in our own accounts, choosing instead to hand those risks off to a clearing firm. As risk profiles go, ours is quite low.”

Passing these three measures would still leave much of the regulatory state intact, but would give ordinary investors and entrepreneurs some much-needed breathing room.